Shopping for the best price on a car is just part of the equation, a great deal on a vehicle can be completely wiped out if you don’t correctly manage the financing. This is a good time to remind you to take a few key steps before going to the dealership, especially if your credit isn’t perfect.
A recent report highlighted how Nissan is essentially doubling down on sub-prime loans. The is a stark reminder that neither the dealership, nor the automaker have the consumer’s best interest in mind and their goal is to make a sale even if that means a serious financial risk to the buyer.
These tactics typically target folks with less-than-ideal credit scores, which typically means a FICO below 700. There are a number of reasons why your score can drop, so if you are not considered a “Tier 1” credit applicant, these three steps are your best defense against getting screwed in the finance office.
Step One - Check Your Credit Score
Remember the old G.I. Joe slogan “Knowing is half the battle”? Unfortunately far too many buyers have no idea what their credit score is until they go to the dealership and apply for a loan. If you don’t know where you stand, you will have no idea what to expect. Your score is the key determining factor on what interest rate you get or whether or not you get approved at all. There are a number of websites that will allow you to check your score for free. Our friends at Lifehacker have some handy links in this post.
Step Two - Understand Your Budget
Buyers get “ripped off” because dealers overcharge them for a car, but too many consumers end up with bad deals because they bought more car than they could realistically afford. This step is probably the hardest because it requires someone to be honest about what they can pay versus what they should pay. Figure out a comfortable monthly payment that won’t stretch you financially, then use a loan calculator to see what your total spending limit would be. Once you have that focus on the cars that fall within that price point. It might be harsh, but it may be your fault if your car payments are too high.
Step Three - Get Pre-Approved
I’ve lost count of how many times I’ve given this tip when it comes to car buying, but for folks with scores below 700, it is even more critical than for buyers with top-tier credit because those people will often qualify for the low APR specials offered by automakers. Local and national credit unions are some of the best places to get a car loan at a reasonable rate. Current and former military service members have access to USAA, but there are a number of credit unions for various professions like teachers, first responders, and so on.
If you don’t belong to a credit union and don’t want to become a member there are some online banks like Lightstream and Capital One that offer auto lending. Capital One’s AutoNavigator app offers what they call a “pre-qualification” which is different than a “pre-approval” as it’s not considered a “hard inquiry” on your FICO score, as those hard inquiries will reduce your score.
Your pre-approval may re-calibrate your budget, if you are trying to maintain a certain payment target and your approved APR is higher than expected, you probably need to dial back the cost of the car, or use a larger downpayment. Do not stretch your loan to longer terms like 84 months so you can “afford” something.
Having a pre-approval means you won’t be at the mercy of whatever the dealer can get you approved for, it also gives you leverage against them to get a lower rate. Remember, dealers can say they have you approved for one rate, and really have you approved for a lower rate and pocket the difference. The other benefit of a pre-approval is it turns you into a “cash buyer” as you can just show up with a check and pay for the car. This makes it a lot more difficult for the finance manager to upsell you on a bunch of overpriced add-ons that will drive your payment up.
Remember, salespeople and finance managers are like sharks with blood in the water when someone comes into the showroom and isn’t savvy about their own credit and finances.
DISCUSSION
I bought a new VW Tiguan in the fall of 2018. I used my company discount which was invoice -$1,000 plus all dealer incentives. No haggling. I go to the finance office and the guy says, “okay, we got you approved at 21.9%!” I pulled a WHATCHU TALKIN BOUT WILLIS and the guy looks at me like I had two heads. He had the wrong paperwork. After we got it straightened out, I couldn’t stop thinking about the person who just might walk out of there with that interest rate. It reminded me of when I worked for GPF in North Atlanta. I got a customer with a 480 credit score. She wanted a brand new car, which they wouldn’t do. So I took her over to the used car side and found a nice 4 year old Civic. She comes out of financing and asks me if she should by the car at a 28% interest rate. I begged her not to buy it. But she was young, her Mom just kicked her out and kept the meth head boyfriend, and she was just trying to get a reliable car for work and turn her life around. Being poor in this country is a punishment and predatory lending is just out of control.